Who is subsidizing who?
Let me get down right to it. I admire the sense of mission with which President Tinubu has gone for this policy, and the impression of seriousness and purposefulness that the move gives his nascent government. This is one of the most difficult policy questions in Nigerian government, and regardless of how it turns out, […]
Subsidy regime
Let me get down right to it. I admire the sense of mission with which President Tinubu has gone for this policy, and the impression of seriousness and purposefulness that the move gives his nascent government. This is one of the most difficult policy questions in Nigerian government, and regardless of how it turns out, it is credit for him for taking on it head-on. Also, I hope for the president to succeed where many before him could not, so that, at the very least, Nigeria can move beyond this issue for once.
However, hope for the new is often dampened by the familiar. All along, the fuel subsidy debate has suffered from three serious problems that have not been addressed enough. First of all, nearly all the arguments so far advanced for fuel subsidy removal have been presented solely in quantitative terms such as the huge costs of financing subsidy annually, or by how much it increases government debt. Second, the call for fuel subsidy removal has tended to ignore other subsidies the government offers in other areas of the economy—such as the subsidy on foreign exchange—that are far more ruinous to the economy than fuel subsidy. Third, withdrawal from subsidy has been presented as if it were the only solution to the corruption that is the real problem of subsidy policy in Nigeria.
These problems, I believe, have skewed the whole debate in favour of subsidy removal, without due regard to the opposite side of the coin, or the morning after. But no one can wish the issues they throw up away, as we all will soon find out.
True, the numbers around fuel subsidy in Nigeria are staggering, and growing. In 2022 alone, the federal government spent N4.39 trillion on subsidizing petrol, against N3.53 trillion on education, health, and infrastructure, combined. And then, N1 trillion of the subsidy payment was borrowed. Therefore, petrol subsidy does damage the economic budget twice over: it takes money away from areas that benefit all of us, particularly the poor; at the same time, it increases the debt burden on the current and future generations. Moreover, the poorest 40 per cent of Nigerians consume just three per cent of petrol, the only fuel still left subsidised in the country.
Fuel subsidies, then, go largely for the benefits of the rich, the middle class, private businesses and the government itself, which owns and runs the majority of the vehicles and generators in the country, not the poor for whom subsidies are intended.
This is one of the major arguments in support of subsidy removal. But it ignores four other factors that define economic life in Nigeria for almost the entire population. One, the poverty rate in Nigeria is just too high. About half the population, that is, some 90 or 133 million Nigerians—depending on which of the data sets by the National Bureau of Statistics you use—are poor in some sense. Two, the dependency ratio is also too high. About eight to nine Nigerians depend on one person for most of their economic needs, a staggering statistic that makes nonsense of who consumes fuel directly or not. Three, Nigerians have very low purchasing power, even among those who have jobs or are nominally in the middle class. Four, there are almost no real safety nets in this country; no unemployment benefits or quality universal healthcare – just each man for their own devices.
My argument then is that in such an economic system, a sizable chunk of the economic burden of the have-nots is borne by the haves. In other words, the middle class and the rich may enjoy more of the benefits of fuel subsidy than the poor, but one way or another, the middle class and the rich actually subsidize economic life for the poor and the poorest in Nigeria.
Therefore, the subsidy on petrol moderates the debilitating effects of high poverty rate, high dependency ratio and low purchasing power without safety nets for everyone, by helping to keep tolerable the cost of everything else. The unit cost of transportation, food, rent, clothes, medicines and hospital bills, school fees and books, etc, all depend on the cost of a litre of petrol.
Complete subsidy removal of the kind the government is contemplating will only see the purchasing power of the poor and the middle class wiped out by the massive inflation and high prices for everything that will ensue over the next two years. Furthermore, fuel subsidy regime cushions the vagaries of the international oil prices and foreign currency markets. Without the subsidy, I doubt if the Nigerian economy can withstand such shocks on daily or periodic bases, as we have seen in the cases of diesel and aviation fuel recently.
Petrol might be selling for N500 today under a no subsidy regime. But what if something happens in the global economy that jerks up the price to say N2000 per litre overnight? Is President Tinubu saying that he will just siddon look? This is very possible even tomorrow, but the point is that there is a lot to think through that has not been thought through yet on this issue.
Moreover, it is not entirely true that removing fuel subsidy will remove the criminal smuggling of petroleum products to neighbouring countries. I am quite confident that it will not be in the medium to long term. Yes, it is true that petrol costs about four times higher in Cameroon or Benin Republic than in Nigeria, thus encouraging the criminal smuggling of the product across our porous borders. But price differentials are just one single factor in the mix.
For imported petroleum products, supply channels are also better in Nigeria than in either Cameroon and or the Benin Republic, because of Nigeria’s sheer market size. That factor will not change merely by the changes in price in Nigeria. If the supply from Nigeria through smuggling trumps other supply channels for products in those countries, then Nigerian suppliers can also still simply jerk up their selling price in those countries.
And then there is the relentless focus on the cost of fuel subsidy in Nigeria. The World Bank and the IMF, the two organisations that have done more than most to secure the near consensus that fuel subsidy is bad economic policy for Nigeria, almost always point to the amount Nigeria spends on subsidy annually. And true, the amounts are not small, as we have seen above. But the government spends just as much, if not more, on other subsidies that scarcely benefit the poor or even the middle class.
The federal government spends billions of dollars annually to subsidize the consumption of imported luxury goods and services, foreign education for a few, medical tourism, and much more through all sorts of foreign exchange windows. Compared to the subsidies on fuel, which as I have tried to show, actually benefit the poor a lot more than numbers can show, the government’s forex subsidies benefit mostly the rich and run to just as many billions.
If any subsidies were to be removed first, it should have been there because it would upset the economy less, and would have immediate positive impacts. But as you might have already guessed, this discussion will go beyond today.